Where is the funding for a $26 trillion initiative coming from?

China's Belt and Road Initiative (BRI) is a multifaceted plan to better integrate the economies of Asia, Europe and parts of Africa in a colossal contiguous market consisting of upwards of 65+ countries and an estimated 30 percent of the world's economic output.

A framework of new transportation infrastructure is being built across the region that will not only act as physical connectors that pull multitudes of countries together, but also as stimulants for local economic activity.

Currently, one maritime and three overland transport corridors are in operation, with many more under construction. The northern, middle and southern rail corridors between China and Europe are all running. The Maritime Silk Road — a network of new and enhanced seaports and adjoining industrial zones extending from the eastern sea ports of China and Hong Kong through Southeast Asia, South Asia, the Middle East, and ending in Venice, Italy — has been developing rapidly.

"The New Silk Road brings new and more efficient transport links, which makes it easier for companies in many parts of the world to become involved in, and benefit from, the Chinese economy," said Frans-Paul van der Putten, senior research fellow at the Clingendael Institute think tank.

"This has created a demand for logistical service providers and ICT companies that support trading between large numbers of relatively small actors over large distances that previously were unable to interact directly with each other."

Asia's infrastructure needs

"The funding requirement for the BRI is unprecedented," said Natalie Blythe, global head of global trade and receivables finance at HSBC. "This is going to require tapping into every single source of public and private funding available."

When adjusted for climate change and adaption costs, the Asian Development Bank (ADB) has estimated that the Asia-Pacific region will require on average $1.7 trillion per year of additional infrastructure investment — or $26 trillion by 2030 — if current economic growth rates are to be sustained.

However, there is a major gap in this funding, as traditional infrastructure investors are not able to foot such a massive bill. According to the ADB, this funding deficit amounts to 2.5 percent of the region's GDP — a full 5 percent if you remove China from the equation. According to various estimates, the BRI alone is going to require a quick $4 trillion to $8 trillion to come to fruition.

One of the main goals of the Belt and Road Initiative is to galvanize the additional financial support necessary for this infrastructure need. To facilitate this, the Asia Infrastructure Investment Bank and the New Development Bank were started; the $40 billion Silk Road Fund was created; China's two big policy banks — China Development Bank and the Export-Import Bank of China — were encouraged to extend over $200 billion in loans to BRI countries; while China's big four non-commercial banks have put up tens of billions of dollars.

However, according to HSBC's Blythe, 90 percent of the funding for the BRI infrastructure projects are coming from the public sector, which she feels is not going to be enough. "We are going to have to tap into the available private investment," she said. "We are going to have to take that private money into parts of the world where it's needed most."

Warning signs

There are some warning signs that are inherent to these massive investments. According to Moody's, 60 percent of BRI member countries have sovereign debt ratings at, or below, Ba1 or don't participate in this rating system to avoid broadcasting their poor performance. Over a third of all BRI investments to date have been deployed to these lower-rated countries, and if you remove Singapore from this analysis then this figure jumps to 54 percent.

However, investment in traditionally poorly performing economies is precisely the point of the BRI. One of the primary goals of the initiative is to use the economic prowess of developed markets to prop-up and assist lagging or under-developed markets through their transition to a more secure, mature economy. For investors, the intrigue is the profits that can be made in the margins of these transitions.

But this isn't just theoretical, it is actually happening. For example, China was one of the first countries to make big infrastructure investments in post-civil war Sri Lanka, earmarking $50 billion for development projects in war-torn and occasionally hostile Pakistan. Beijing is making major inroads in developing the transportation networks of Bangladesh, as well as large-scale development endeavors throughout Africa. The BRI enters terrain that few other initiatives are willing to step into, and leaves behind a trail of new roads, rail lines, bridges and power plants — essentially priming struggling Asian and African nations for further investment.

Economic impact of new infrastructure

The development of new infrastructure — especially in the transportation sectors — often initiates two waves of economic stimuli. The first is the most obvious: the building of the actual infrastructure itself involves the exchange of large amounts of money, the tendering of big contracts, and the mobilization of masses of workers and the grassroots service economy that sprouts up to support them. But it is the secondary wave of economic stimulus that should become the hallmark of the BRI.

"Let's assume that we have a rail going through — a mass transit rail going through the middle of Shanghai — immediately alongside the rail there will be development," said Peter Wong, Deputy Chairman and Chief Executive at HSBC. "It can be commercial, residential, it can be infrastructure — let's say hospitals, schools and also it will bring wealth to the total area."

The economic resonance of the infrastructure that the BRI is creating is going to have a lasting impact on the markets it traverses, providing new opportunities for investment and development in multiple sectors.

The immediate impact of this new infrastructure can already be observed along the Kunming to Singapore corridor of the BRI, which has as its nervous system an emerging new high-speed railway. Extending south from the capital of China's Yunnan province through Laos, Thailand, and Malaysia before terminating in Singapore, the route goes through countries that maintain solid diplomatic ties with China — and the results of which are being emblazoned in steel and concrete.

The $5.2 billion stretch of this rail line that goes through Thailand is already seeding growth in multiple sectors, according to HSBC. Airports and seaports are being built, homes are appearing, a major theme park is being developed, and social institutions such as hospitals and schools are being constructed along the right-of-way of the impending track.

Like in the days of the ancient Silk Road, the transportation routes and the economies of Europe and Asia are again becoming integrated, as countries are focusing on similar developmental objectives and long-term economic goals.

"Today, already we witness confirmed investments along the New Silk Road," said Karl Gheysen, the founding CEO of the Khorgos Gateway dry port on the Kazakhstan / China border. "It's not just commitments — construction has started in many cities and countries along this new route. It all sounds spectacular, but it's just history repeating itself."

HSBC has been named Best Overall International Bank for Belt and Road Initiative (BRI) in the inaugural Asiamoney New Silk Road Finance Awards, reflecting the Bank’s commitment to being the leading financial partner to clients engaged in Belt and Road projects.

China’s Belt and Road Initiative is creating enormous business opportunities throughout Asia, Africa and Europe which HSBC could help you exploit. Covering two trade routes, the overall objective is to increase regional trade and encourage economic cooperation.

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